When Unequal Pay Makes Everyone Less Productive

A study of hundreds of Indian workers shows pay inequity affects output and attendance

The output of workers paid less than co-workers in a new study dove 22% compared with colleagues in teams where workers earned the same. Meanwhile, better paid-colleagues were no more productive—and had lower attendance.
Photo:
Richard Lewisohn/Zuma Press

When workers are paid differently for little reason, even the higher-paid ones are less productive and happy, a new study suggests.

Economists at Columbia University and University of California, Berkeley, have shown that workers seem to be highly averse to pay inequality, just as primatologist Frans de Waal’s capuchin monkeys famously threw food at their keepers when they were rewarded differently.

In a study the authors claims is the largest such experiment ever conducted, 378 Indian workers—with differing levels of productivity—were trained and hired into monthlong seasonal contract jobs, working in factories that produced low-tech items such as ropes and brooms.

They were organized in teams of three workers. All 378 were paid either 240 rupees a day to turn up to work, or 5% more or 5% less than that amount.

In most of the teams, the three workers were paid the same amount. But, crucially, in some, workers’ pay differed according to the workers' individual levels of productivity (which had been determined earlier). This clever design meant the economists could compare the performance of workers who earned the same amount—either high, middle or low—but differed according to whether they were members of equally or unequally paid teams.

Psychologists, and some economists including standouts like John Maynard Keynes and Thorstein Veblen, have argued relative pay matters to people’s happiness and productivity as well as, or even more than, absolute levels of pay. Economists have resisted this assumption, as it violates a kind of rationality. Surely workers would prefer a $10,000 raise even if their colleagues were getting $20,000, rather than be singled out for a $5,000 raise.

These Indian workers, however, cared a lot. The output of workers paid less than their two co-workers dove 22% compared with colleagues in teams where workers earned the same. They turned up to work 12% less, too. These effects tended to worsen the longer the pay disparity lasted.

Their two better paid-colleagues were no more productive. “What surprised us most...was that even the people who were paid more were less satisfied and no more productive. In fact, the highest- and median-wage workers also had substantially lower attendance,” said Emily Breza, one of the authors, in an interview. “Overall, workers gave up 9.3% of their earnings to avoid a workplace where they are paid differently than their peers."

Remarkably, after the month of work, the researchers asked the 126 teams to build towers out of raw materials, where they would be paid based on the height of the tower. Unequally paid teams built 17% shorter towers, on average.

The study found an important caveat, though. When the difference in productivity among workers in a team—which, given the nature of the work, could be easily observed—swamped the relatively small 5% pay differences, no effect on output or attendance was found.

In advanced countries, income inequality has been increasing. Other research suggests employers are alive to the potentially damaging effects of paying close colleagues too differently. A study of U.S. wage dispersion from 1978 to 2012 indicated rising inequality was being driven by growing differences in pay across industries and businesses, rather than within them.

“Pay differences within employers have remained virtually unchanged, a finding that is robust across industries, geographical regions, and firm-size groups,” researchers found.

It’s your neighbor’s pay that matters for satisfaction, it seems. Among the Indians, for instance, managers didn’t reveal anyone’s pay at the start of the month. But 87% of the workers knew their immediate colleagues’ pay by the end of the month, while only 7% knew the pay of workers in other teams.